What is Forex? Forex is short for foreign exchange markets. Forex trading involves trading foreign currencies and betting on the ratio of one currency against another. The Forex market is the largest financial market in the world with over $3 trillion exchanged daily. It is open 24 hours a day 5 days a week and can be done from anywhere in the world. Mobile apps have made trading even easier.
Facing lackluster performance in the stock and bond markets, many seasoned traders are moving their money to Forex markets. But even experienced traders should be cautious before plunking down their money.
Forex entered the financial arena in 1978 when worldwide currencies abandoned the gold standard and were allowed to float according to supply and demand. The market was dominated by large banking institutions, multi-million dollar corporations and wealthy persons and was opened to individual traders in 1995. Thanks to the technology revolution and high speed internet, Forex trading gained popularity rapidly and became available to all investors. See more on Forex brokers review.
So How Does Forex Work?
Foreign currencies are always in high demand and there are constant traders around the world who are making and meeting demands for a particular currency. Currencies are needed for international trade and are used by central banks and global businesses that have relied on foreign-exchange markets since 1971.
Every second, countries’ economies grow and shrink as a result of economic and political instability and various other ongoing changes. Central banks try to stabilize their country’s currency by trading it on the open market and maintaining a relative value compared to other world currencies.
Businesses with a presence in more than one country strive to reduce the risks of doing business in foreign markets while hedging currency risk. They can do this by conducting currency swaps, allowing them to buy a set amount of a foreign currency for a set price in another currency at a date sometime in the future, thus restricting their exposure to wide fluctuations in currency evaluations.
Forex is able to trade over a 24-hour period due to the fact that it is comprised of a network of computers in many countries with different time zones rather than any one physical exchange that closes at a specific time.
Forex trading begins in the Australasia zone and is followed by Europe and North America. As the markets in one region end their trading, those in another region begin, or have already commenced so Forex trading continues in a non- stop manner around the world, sometimes overlapping for a couple of hours. So a trader in New Zealand who decides he wants to trade Forex at 4:00 am may not be able to do so via the Forex dealers in Australia. He can, however, use the services of a dealer in North America or Europe. This international connection allows a Forex trader to make trades at any time during the trading week.